Insurer off hook in bar fight judgment because of late notice

An insurer is not obligated to pay a $5 million judgment stemming from a bar fight where a man was severely injured because the bar’s owners did not comply with its policy’s notice provisions, says a federal appeals court, in affirming a lower court ruling.

In September 2012, a bar patron assaulted Emmanuel Kehagias at Ruth’s Bar and Grill in Mount Pleasant, South Carolina, leaving Mr. Kehagias in a permanent, quasi-vegetative state, according to Thursday’s ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, in Founders Insurance Co. v. Richard Ruth’s Bar & Grill LLC.

Mr. Ruth and his wife had purchased commercial general and liquor liability policies from Des Plaines-Illinois based Founders. Founders does not sell insurance directly and uses a wholesaler and insurance agent, through which the couple obtained the coverage, according to the ruling.

The policies required the Ruths to notify Founders “as soon as practicable for any occurrence which might result in a claim against the insured.” After they were sued on behalf of Mr. Kehagias, they forwarded a notice of representation letter they received from his attorney to their agent, but Founders was not notified.

In February 2013, the state court entered default against the bar. Founders received legal papers in May 2013, and hired an attorney to defend the Ruths in the underlying state court action. The state court then denied a motion to set aside the default ruling.

In April 2014, the court issued an order of judgment against the bar and the couple individually for $5 million. The Ruths subsequently assigned their rights in the case to Mr. Kehagias.

Founders filed suit in U.S. District Court in Charlotte, South Carolina, over the issue of coverage, and Mr. Kehagias filed counterclaims against the insurer. The district court ruled in Founders’ favor, which was upheld by a unanimous three-judge panel.

Founders “did not receive notice of the lawsuit or copies of the legal papers until the Ruths were in default in the underlying action,” said the ruling.

“Because Founders was unable to obtain relief from default, Founders did not have the opportunity to properly investigate the case, to raise defenses to the lawsuit or to negotiate a settlement without the handicap of the default position. This, in turn, led to the entry of a five million dollar default judgment against the Ruths,” the ruling said.

“Based on these facts, we find there is no genuine issue of material fact as to whether Founders’ rights were substantially prejudiced by the Ruths’ failure to provide notice of the lawsuit and copies of the legal papers,” said the ruling, in affirming the lower court’s decision.

Founders attorney Russell F. Conn, a partner with Conn Kavanaugh Rosenthal Peisch & Ford LLP in Boston, said in a statement he was gratified by the ruling.

He said the district court and 4th Circuit decisions “are entirely consistent with controlling South Carolina Supreme Court precedent, and indeed precedent nationwide, that an insured who fails timely to forward suit papers to its insurer, resulting as it did here in a $5 million default judgement, substantially prejudices the insurer’s rights and voids coverage.

“It was significant here that Founders, despite the prejudice, stepped in and defended under a full reservation, doing everything it could to remove the default, including even the taking of an appeal, while the claimant’s counsel steadfastly refused to assent to the default’s removal.”

Mr. Kehagias’ attorney could not immediately be reached for comment.

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